• Illustration: The Xbox

Microsoft launched the Xbox, its much-awaited US$300 gaming console, in North America on Nov. 15. Approximately 300,000 units were available in retail stores on the launch date, which is considerably less than the 600,000 to 800,000 that Microsoft originally expected. The company says it will restock stores at a rate of up to 100,000 units per week to meet its goal of shipping between 1 and 1.5 million Xboxes by the end of 2001, and it hopes to sell between 4.5 and 6 million units by the end of its fiscal year (June 30, 2002).

Microsoft will launch the Xbox in Japan on Feb. 22, 2002, giving Japanese developers time to complete more games before launch, and in Europe on Mar. 14, where it will be the first gaming console manufactured in a European plant (by Flextronics in Hungary).

Prospects for Success

Microsoft's first foray into the console gaming industry will be expensive—analysts estimate the company will lose between US$20 and US$80 on each box sold, and Microsoft does not expect to break even from game sales and licensing until 2003 at the earliest. Although Microsoft has not publicly revealed licensing terms, analysts estimate the company will make around US$10 per third-party title sold, and up to US$40 in profit from each of its own titles. (Xbox titles retail for about US$50.) In other words, Xbox will only succeed if Microsoft and third-party developers create enough interesting titles so that gamers buy several games for each console. Here, Xbox will face its stiffest competition from Sony's US$300 PlayStation 2 (PS2), which was released in late 2001 and already boasts a library of 175 games: game manufacturers can play it safe by cranking out new PS2 titles to appeal to its installed base of 20 million users, rather than taking a chance on the Xbox. In addition, Nintendo's less-expensive (US$200) GameCube, released three days after the Xbox, might dilute demand for a new gaming console, although it targets younger users than Xbox does.

Nonetheless, the Xbox has several advantages that could turn it into a profit center for Microsoft:

More power. The Xbox offers noticeably better graphics and more processing power than either PS2 or GameCube, making it better suited to fast-action "twitch" gaming. This could attract an early market of hardcore gamers, which in turn could increase other game developers' willingness to create titles for the platform.

Broadband connectivity. Unlike its competitors, the Xbox comes with a built-in Ethernet adapter, enabling users to plug into broadband connections and compete over the Internet. Microsoft and partners such as NTT Communications (a Japanese telecommunication provider) plan to launch an Xbox gaming network in 2002. The network could provide subscription revenues and spur the sales of new titles that are tailor-made for networked competition.

Hard drive. The Xbox's 8GB hard drive will provide useful gaming functions (such as saving games in progress or downloading new levels) immediately and could eventually be employed for more general entertainment-related functions (such as storing songs ripped from audio CDs or downloaded from the Internet).

Financial backing. Microsoft has enormous cash reserves—US$36 billion at last count—and can afford to put considerable marketing muscle behind the Xbox and wait for it to succeed.

Resources

For more background on Xbox, see "X-Box Console to Be Launched in 2001" on page 17 of the Apr. 2000 Update.

The official site is www.xbox.com.